The profit margin on producing 92-octane gasoline at a typical Singapore refinery dropped to $2.37 per barrel of Brent crude on Oct. 26, the lowest in 27 months, according to Refinitiv dataREUTERS | October 29, 2018, 16:22 IST

LAUNCESTON, Australia: It may be stretching the bow too far to blame Donald Trump for the collapse in the profits Asian refiners get for making gasoline, or indeed for the surge in diesel profits, but the policies of the U.S. president are certainly playing a role.

The profit margin on producing 92-octane gasoline at a typical Singapore refinery dropped to $2.37 per barrel of Brent crude on Oct. 26, the lowest in 27 months, according to Refinitiv data.

At the same time, the profit, or crack, for making a barrel of gasoil with 10 parts per million of sulphur - the base for diesel and jet fuel - reached $18.53 above the price of a barrel of Dubai crude on Oct. 26, the strongest since February 2015.

This means that Asian refiners are making large profits from producing diesel and jet fuel, but barely scraping by on gasoline.

However, the strong profits for the middle-distillate fuels mean the refiners are still incentivised to maximise their crude throughput. That means they will continue to produce large volumes of gasoline, even though it's hardly worth their while to do so.

How does Trump fit into this picture? The main influences are the unintended side-effects of his administration's ongoing trade war with China and the renewed sanctions against Iran's crude oil exports.

The escalating trade dispute with China has led the authorities in Beijing to once again open the infrastructure spending taps in a bid to stave off a slowdown in their economy caused by the U.S. imposition of tariffs on imports from China.

This has had the impact of increasing domestic diesel demand, which has led to a reduction on Chinese exports of the transport fuel.

China's exports of diesel in September dropped to a 21-month low of 1.03 million tonnes, or about 257,000 barrels per day (bpd), according to customs data released on Oct. 23.

In the first eight months of the year, China's diesel exports had averaged 409,000 bpd, and in May they reached 484,000 bpd, the highest month so far in 2018.

The surge in China's diesel exports in May also coincided with the weakest profit margins for Asian refiners producing the fuel, with the crack dropping from mid-May to late June, when it hit a low for 2018 of $12.97 a barrel on June 27.

HEAVY CRUDE DEFICIT

Lower diesel exports from China are likely to have helped push the profit margin to its recent highs, but it's also worth noting that Asian refiners are finding it harder to source barrels of heavy sour crude grades. These typically yield more middle distillates such as diesel and jet fuel, and fewer light distillates like gasoline and naphtha.

The Trump administration's renewed sanctions on Iran's crude exports come into effect on Nov. 4, but major buyers in Asia, such as India, have already cut back on purchases from the Islamic Republic.

While China has yet to curtail its buying from Iran, indications are that it will do so from next month.

It's also likely that much of the Iranian crude heading to China will be placed in bonded storage tanks, meaning it won't clear customs and is therefore unavailable to Chinese refiners.

Overall, the impact has been to reduce the amount of heavy crude available to Asian refiners, many of which operate complex plants capable of maximising diesel and jet fuel output from this type of crude.

The reduction in cargoes heading to Asia from Venezuela, another heavy crude producer, has exacerbated the situation.

Some refiners have been turning to lighter crudes from Russia, the United States and West Africa to replace heavy crudes, which have also become more expensive.

This has increased the amount of gasoline available in Asia, contributing to a reduction in the profit margin for making the fuel predominately used by light vehicles.

The gasoline glut may become worse in the coming weeks as China has issued new fuel export quotas. These will likely increase the amount of fuel being exported.

There is a further interesting dynamic at play at the retail level in several countries in the Asia-Pacific region: gasoline prices haven't dropped much at all for consumers.

In India and China, gasoline prices are higher than those for diesel, while in Australia, gasoline is only slightly cheaper.

While Chinese retail prices may well be described as managed according to movements in the crude price, those in India and Australia are largely set by market forces.

If there is a glut of gasoline in the region, it would be logical to expect refiners to try and clear it by lowering prices in order to stimulate demand. But this hasn't happened so far.